Lagging PC Sales, Strong Dollar Cut Into IBM’s Profit
IBM Corp. on Monday reported flat second-quarter profit, amid slower sales of personal computers, price wars in computer chips and reduced consumer demand caused by the Asian economic slump.
The results beat Wall Street forecasts slightly. But the drop in hardware and other sales at IBM, and also the strong dollar, offset gains in software and in the company’s fast-growing global services unit, which helps big businesses set up and run their computer systems and networks.
Net income for the world’s largest computer maker was $1.45 billion, or $1.50 a diluted share, compared with $1.45 billion, or $1.43, a year earlier. IBM was expected to earn $1.49 a share, according to analysts polled by First Call Corp. Sales for the quarter fell to $18.82 billion from $18.87 billion.
IBM’s revenue from computer hardware, its biggest business, dropped 13% as sales in Asia and Latin America fell. IBM said problems in Asia and plummeting prices for PCs will persist. IBM’s PC business lost money this quarter, but its services business, which sets up and runs corporate computer systems, had sales of $5.6 billion, up 22%.
“It’s a company in transition,” said analyst David Takata of Gruntal & Co. “Services is the brightest spot for IBM. The rest of the story is just so-so.”
Shares of Armonk, N.Y.-based IBM ended the day up $1.81 at $122 in “third-market” trading that may have included some trades after the earnings report. The shares have climbed about 13% in the last four weeks.
Much of IBM’s gain in per-share earnings came from a share buyback and cost-cutting, a strategy the company has been using for many quarters. If IBM had the same number of shares outstanding for this quarter as for a year earlier, its profit would have been $1.43 a share. The company also benefited from a lower tax rate.
IBM, which still has $2.6 billion more to spend on buybacks, said it will continue to repurchase shares. “As long as your shares are undervalued and you can afford it, you should be buying them back,” IBM Chief Financial Officer Douglas Maine said.
Maine said the strength of the U.S. dollar against other currencies shaved about 13 cents off the company’s per-share earnings. The stronger dollar means that revenue IBM earns abroad is worth less in dollars. More than half of IBM’s sales come from overseas.
Excluding the effects of the strong dollar, IBM’s revenue would have risen 6% during the quarter. IBM said that excluding the PC business and the effect of currency, sales would have been up 10%.
PC units declined and expenses increased as prices were slashed and marketing with distributors rose.
“The PC business has been a drag on our growth rates,” Maine said, adding that he expects that business, which lost money in the second quarter, to improve in the third quarter.
IBM is trying to switch to a more direct model of selling its computers so it doesn’t get stuck with old machines sitting at warehouses. “Much of the financial burden of this transition should be behind us,” Maine said.
IBM’s services business, which helps customer set up, maintain and run computers, is the company’s only consistently expanding business.
“We absorbed three major hits that affected the industry,” Chairman and Chief Executive Louis Gerstner said in a statement. “Intense price competition and excess inventory in the PC channel, continued severe price erosion in [memory] chips and the impact of the Asian crisis.”
Gerstner said he remains cautious about the Asian situation and the outlook for dynamic random-access memory chips.
Sales of mainframe computers, PCs and other hardware fell to $7.52 billion. Sales of software, IBM’s most profitable business, rose 4.7% to $3.23 billion.
Sales in Asia fell 13% to $3.3 billion, and sales in Latin America fell 8% to $782 million. Sales in North America were up 5% and sales in Europe rose 2%.
* MORE EARNINGS: D2-3
